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An Update on California Rent Control: What You Need to Know

13 Minute Read

Statewide rent cap signed into law for first time in California history

Marking the most significant policy change for California rental housing in 25 years, Governor Gavin Newsom signed Assembly Bill (AB) 1482 into law on October 9, 2019, effectively enacting a statewide rent cap for the first time in the state’s history.

The new law titled Tenant Protection Act of 2019 imposes restrictions on how rent control ordinances can be enacted, but only at the local level.

In addition to AB 1482’s impact on pricing, it includes a provision requiring landlords to have “just cause” when evicting a tenant, such as failing to pay rent or violating a lease.

AB 1482 will be on the books for the next 10 years, beginning January 1, 2020 until it expires on the same date in 2030, unless the State Assembly votes to extend it. Applicable to apartments and other multi-family properties that are 15 years of age or older, it is estimated to affect about 2.4 million California households, according to the UC Berkeley’s Terner Center for Housing Innovation.

The passage of AB 1482 makes California the second state in the nation to pass a statewide rent cap. A similar law took effect in Oregon earlier this year which caps annual multi-family rent hikes to no more than 7 percent plus inflation. Separately, in September of this year, the Los Angeles County Board of Supervisors became the latest locality to unanimously vote for rent control. More than 43,000 multi-family units built on or before February 1, 1995 and located in unincorporated areas of Los Angeles will now be subject to rent control under the new measure.

The passage of AB 1482 makes California the second state in the nation to pass a statewide rent cap.

The lone survivor on Assembly floor

Last November, Proposition 10, which would have allowed cities to expand rent control policies of their own, was voted down at the ballot box. The Assembly then crafted AB 1482 to address some of the key issues that contributed to the bill’s failure. In the end, AB 1482 was one of the few stragglers to survive the State Senate out of the handful brought to the floor last spring.

The new law was authored by Assembly members behind the creation of Proposition 10, David Chiu (D-San Francisco), Rob Bonta (D-Oakland), Timothy Grayson (D-Concord) and Buffy Wicks (D-Oakland). Speaking for the group, David Chiu states, “In the midst of the most intense housing crisis in California history, we must take decisive action to stem the tide of displacement and homelessness."

How AB 1482 works

1. RENT CAP
The law restricts raising rents by more than 5 percent annually but bumps up this ceiling by tagging on the percentage change in the cost of living or 10 percent, whichever is lower. In total, it is estimated to allow an annual increase of around 7.5 percent a year in California.

The new law takes California rent control in two different directions. It applies only to cities that don’t currently have local rent control, rolling back any rent hikes enacted above the cap after March 15, 2019, but will not override the Costa-Hawkins Act in cities that do.

For example, since the City of Los Angles already has rent control on units built before 1978, AB 1482 only covers units that are not already protected. This amounts to several hundred thousand newer units that opened in the nearly three decades from 1978 and 2005.

 

2. "JUST CAUSE" PROVISION
In addition to instating rent control across the state, AB 1482 also requires owners/landlords to demonstrate “just cause” before evicting tenants that have lived in a rental unit for at least 12 months—or 24 months in the case of two or more tenants. Property owners who want to evict tenants to convert to condos or make renovations will have to pay a relocation fee equal to one month’s rent.

What properties are affected?

AB 1482’s rent cap and just cause provisions largely apply to apartments and other multi-family properties that are 15 years of age or older. This is a rolling date, so units built in 2006 will be covered by AB 1482 in 2021, units built in 2007 in 2022, etc.

What properties are exempt?

Lobbying from real estate interests exempted a number of properties from the law, including single-family homes, townhouses and condos, except when owned by corporations or Real Estate Investment Trusts (REITS). The law also exempts duplexes when one unit is occupied by the owner.

What effect will this have on property values for apartment owners?

AB 1482 affects apartment property values in varying ways, depending largely on location:

  • In outlying areas that rarely chalk up rent growth above 5 percent, the repercussions will be minimal. And although increased tenant rights, as granted by the “just cause” provision, will come into play, this should have a nominal impact on property valuations.
  • In areas with more restrictive rent control, there will also be little effect.
  • For other areas, implications could be multifaceted. It is widely recognized by the industry that rent control can dampen the incentive to build more apartment units. Therefore, supply limitations could restrain vacancy levels and step up the pressure on rent growth.Property values will be highly dependent on tenant turnover and the ability to raise rents to market rates.

As one landlord wrote in a letter to The San Diego Union-Tribune, “the new law could potentially drive landlords to impose the maximum legal rent increase every year to avoid falling behind the market since they won’t be allowed to catch up in a single ‘swoop’.” In fact, if the roughly 7.5 percent increase is applied annually, it would effectively double rents over a ten-year period.

The new law could potentially drive landlords to impose the maximum legal rent increase every year to avoid falling behind the market since they won’t be allowed to catch up in a single ‘swoop’.

How could AB 1482 impact real estate investors?

Investors need to consider that rent control often deters new multi-family construction, so limited supply growth will naturally blend with limited rent growth under the new rules.

Vacancy rates then would likely tighten even further, transforming the investment landscape into one of controlling costs and managing slow growth revenue streams on a long-term basis.

However, although owners will have to contend with slimmer margins going forward, the current rent cap should provide most investors with the revenue to keep up with property improvements.

Kim R. Hosea, Senior Real Estate Asset Manager at Union Bank, cautions that, “Changes in ownership resulting in significant increases in the property’s tax assessment will be particularly difficult to absorb for the investor and might suppress sales prices due to narrower margins. However, investors can still achieve their objectives within the confines of the new legislation, but careful planning and a comprehensive understanding of the market and the regulations that will apply to it will be critical.”

More to come on November ballot

The California Apartment Association (CAA) was steadfastly opposed to AB 1482 in its original form until it secured a number of amendments.

In its view, the initial bill failed to address the ongoing housing shortage and stood to make the problem worse. “It’s time we work together to advance policies that will add housing that working families can afford instead of blanket policies that don’t address the real problem—a lack of supply,” said Tom Bannon, CAA’s Chief Executive Officer.

While a number of tenants’ rights groups initially supported AB 1482, many have critiqued the “watered-down” version that emerged after lobbying and amendments. Some advocates say that without vacancy control—which stabilizes a unit’s rent even after a tenant moves out—it will do little to quell rising rents overall.

New Rental Affordability Act set for 2020 ballot

Also unimpressed by the compromised version of the bill, Housing is a Human Right, the housing advocacy division of the Los Angeles-based AIDs Healthcare Foundation, recently announced that it had collected more than 625,000 signatures to earn its Rental Affordability Act a place on California’s statewide ballot in November 2020.

Housing justice activists are continuing to collect signatures before the end of the year to ensure that the initiative qualifies by a healthy margin. A total of 623,212 signatures are required for eligibility.

How the Rent Affordability Act differs from current law:

Here’s how the proposed bill compares to current law, the Costa-Hawkins Act:

  • Rental Affordability Act: Allows a city or a county to exercise any local law controlling the rental rates for residential property, providing it has been at least 15 years since the property received its certificate of occupancy.

    Versus Costa-Hawkins: Any building built after 1995, or after the year a city enacted its own local rent control policy, whichever is earlier, is not subject to rent control.

  • Rental Affordability Act: Single-family homes and condominiums are exempt if the owner is an individual (not an LLC or corporation) that owns one or two homes.

    Versus Costa-Hawkins: Single-family homes and condominiums are exempt.

  • Rental Affordability Act: Vacancy control is limited, with a 15 percent rent increase allowed when the original tenant moves out (up to once every 3 years).

    Versus Costa-Hawkins: Vacancy control is not allowed. Once the original tenant moves out, rents can be raised by any amount. This also applies to subtenants, even if they choose to stay in the rental.

Costa-Hawkins has remained on the books for nearly 25 years. But even with the passage of the more restrictive AB 1482, the rent control tug-of-war rages on, as tenant advocates continue to push for stricter rent control laws in California and local governments increasingly respond.

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This is a publication of The Private Bank at MUFG Union Bank, N.A. (the Bank). This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third-party sources deemed to be reliable. The Bank makes no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bears no liability for any loss arising from its use.

 

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